Greeks of Financial world : A Over sight

Standard deviation (SD):

This parameter essentially reports an investment’s volatility of returns. It measures the degree to which the security or fund fluctuates in relation to its mean return or the average return delivered over a period of time. A fund that has a consistent four-year return of 13%, for example, would have a mean or averageof 13%. The standard deviation for this fund would be zero because the fund's return in any given year does not differ from its four-year mean. On the other hand, a fund that has over the last four years

generated returns of -5%, 17%, 2% and 30% will have a mean return of 11% and a standard deviation of 9.8 This fund thus exhibit a high standard deviation and is therefore more risky given that each year its returns have differed significantly from the mean return.

Beta:
While standard deviation determines the volatility of a fund according to the disparity of its returns over a period of time, Beta also known as the ‘Beta coefficient’, determines the volatility of an investment or security in comparison to its benchmark index. You can think of it as the tendency of your investment’s returns to respond to swings in the market or its benchmark index.

R-Squared:

The R-squared of an investment say a mutual fund can provide you with the critical information if the beta of the mutual fund is measured against an appropriate benchmark. Measuring the correlation of a fund's movement to that of an index, R-squared describes the level of association between the fund's volatility and market risk, or more specifically, the degree to which a fund's volatility is a result of the day-to-day fluctuations experienced by the overall market. R-squared values range between 0 and 100, where 0 represents the least correlation and 100 represents full correlation.

 

Alpha:

In contrast to the above measures, which examine figures that measure risk posed by volatility, Alpha is a measure to calculate the extra return generated by an investment by taking risk posed by factors other than market volatility. In simple terms, it measures how much if any of this extra risk helped the security or the fund outperform its corresponding benchmark. Using beta, alpha's computation compares the fund's performance to that of the benchmark's risk-adjusted returns and establishes if the fund's returns outperformed the market's, given the same amount of risk.

Using the above statistical measures can help you get a better perspective of your investment’s returns potential against the background of the underlying risks.